The Most Interesting Story In Gold

The gold and silver miners are in crisis, as metal prices hover around break-even
for many and capital dries up for most. Dozens of companies are one or two
quarters away from running out of cash and closing down, and their executives
are ready to deal.

This is, in short, the part of the cycle when the smart money sets itself
up to make a fortune in the next bull market. Chief among this bunch are the
streaming companies that finance developing mines in return for a share of
future production.

In good times they do all right but find it hard to cut deals on favorable
terms because the miners have access to cheap capital from less discerning
banks and equity investors. But at the bottom of bear markets -- like now --
the streaming companies find themselves virtually alone in the industry in
having both cash and an interest in putting it to work. Miners who need financing
to survive now have nowhere else to turn, and the streaming companies are feasting.
Here's a recent Bloomberg profile of the biggest of them:

For Franco-Nevada Corp., the best time to take on debt is at the bottom
of a market. The day may be approaching for the Canadian royalty and streaming
company as the commodity rout boosts demand for alternative funding.

"There are so many opportunities out there, we might have to dip into our
credit lines," Chief Executive Officer David Harquail said in an interview
last week from his Toronto offices. "The ideal is you lever yourself up at
the very bottom of the bear market and hopefully, if you've called it right,
then you really benefit as the market turns around."

Streaming companies like Franco-Nevada, Silver Wheaton Corp. and Royal Gold
Inc. give miners upfront payments in exchange for the right to buy metals
at a discount in the future. Franco-Nevada also does royalty agreements,
tying portions of production to land titles.

Plunging metal prices, with copper down 24 percent and gold 11 percent in
the past year, combined with surging credit costs and volatile stock markets,
have made streaming attractive even for majors such as Barrick Gold Corp.
and Freeport-McMoRan Inc., giving the business more credibility.

"It's something that's gone from being seen as kind of hokey, to where now
every major company and their CFO has to consider it among their financing
options," Harquail said.

Unused Credit
With no debt, about $610 million in cash, plus $110 million in marketable
equities and an unused line of credit worth about $1 billion, the company
has plenty of scope for more deals. "Without going back to the equity markets,
right now, we've got one and a half billion to play with," Harquail said.

Two types of deals have become more common in recent years, Harquail said.
Medium-sized producers are turning to royalty and streaming companies for
help buying assets from larger miners. Lundin Mining Corp.'s purchase of
Freeport's Candelaria copper mine, which Franco-Nevada helped finance in
exchange for a gold and silver stream, is a case in point, he said.

Also, the largest producers are now willing to sell streams on their most
prized assets, Harquail said. "We're getting the opportunity to bid on some
of the best mines in the world."

For an idea of how much things have changed in mining, consider Glencore.
With a 2011 market cap of $100 billion, it could have swallowed all the streaming
companies without getting indigestion. Then commodities tanked and Glencore's
stock crashed -- and now it's scrounging for the funds to keep its mines afloat:

(Reuters) - Glencore is in talks with Franco-Nevada Corp, Silver Wheaton
Corp, Royal Gold, and Osisko Royalties to sell portions of the future production
of three South American copper mines. One source said on Wednesday the talks
could expand to include other Glencore mines.

The longer the gold/silver bear market grinds on, the more desperate the miners
become and the better deals the streaming companies receive. And when prices
rebound -- as they will (since if they don't the mining industry will collapse
and supplies will dry up) the streaming companies will generate massive cash
flow.

Here's what this meant for the market values of the biggest streaming companies
following the 2008 precious metals bear market:

Will they do this again? No. They should do a lot better because the 2008
precious metals bear market lasted less than a year, which was too little time
for the proper amount of panic to take hold. This bear market has been grinding
on for three years, and now the miners are out of cash and desperate, which
should allow far more ounces to be bought at bargain basement prices -- and
far more cash to be generated on those ounces when prices start rising.

John Rubino edits DollarCollapse.com and has authored or co-authored five
books, including The Money Bubble: What To Do Before It Pops, Clean
Money: Picking Winners in the Green Tech Boom, The Collapse of the Dollar
and How to Profit From It, and How to Profit from the Coming Real Estate
Bust. After earning a Finance MBA from New York University, he spent the
1980s on Wall Street, as a currency trader, equity analyst and junk bond analyst.
During the 1990s he was a featured columnist with TheStreet.com and a frequent
contributor to Individual Investor, Online Investor, and Consumers Digest,
among many other publications. He now writes for CFA Magazine.